Have you planned your exit from your business?

Despite many accountants supporting their clients with succession planning and commercial sale, few have turned their attention to their own exit warns John Edwards, CEO and Group Executive International of the Institute of Financial Accountants (IFA). In failing to do so, business owners aren’t realising the growth and financial potential of the business they have strived to build. 

While 25% of business owners fall into the 35-44 age bracket, 31% have owners in the 45-54 bracket, and 25% are in the 55-64 bracket. A further 7% are over the age of 65. This represents a significant proportion of business owners who already or will exceed the retirement age in the next decade according to figures from the Office of National Statistics. To put this in perspective, in 2022, 700,000 people reached state retirement age in the UK. While statistics on exit strategies vary from study to study, they generally concur that less than 10% of businesses have a formalised exit strategy, around 30% have an informal strategy, and almost 60% have no exit strategy at all.

Exit planning: does it matter?

Put simply, yes, if you want to realise the value of the hard work you have put into your business. Whatever the size, from sole trader to multi-employee practice, there is saleable value in the Intellectual Property (IP) and client roster that you have built. In an average year, less than 30% of businesses are successfully sold, and a significant reason for this is lack of planning.

John comments “We see the same trends in accountancy that are seen across all other business sectors, despite the fact that accountants are best placed to help businesses realise their saleable potential. It’s a cliché but we’re so busy applying our skills to assist others, that our own affairs lack priority. It’s such a shame to see this loss of value, and it also leaves clients without the continuity of care that they’ve otherwise received.”

How to exit your business

For a solvent operator, there are three main strategies for exit:

• Succession: passing or selling the business to a family member, or to an employee that already works in the business. 
• Sale: realising the financial potential of your business by sale to another operator or individual. 
• Members voluntary liquidation (MVL): the most common outcome for UK businesses that haven’t comprehensively planned their exit. When there is no real market for the sale of a business, and no plan for succession, the only alternative is to close the business and distribute the profits. There is no legacy for the work you have done, or the reputation you have built, and your clients will left  seeking an alternative trusted business adviser.

All three of these strategies are legitimate, but only succession or sale recognises the value and reputation that you have built and supports you to offer clients a credible long-term alternative to your own advice. For accountants that have spent years building their reputation, gaining client trust, and delivering commercial value, it can feel disappointing to close your business and to not be able to offer your clients an alternative. 

How to realise the value of your business

It all comes down to planning. The most common reason that businesses, particularly sole traders, fail to secure a sale, is that they don’t have the processes in place for the business to operate without the owner. Systems are incredibly powerful, and while many clients buy into your business because of you or your people, being irreplaceable is the exact opposite strategy required to realise the value of your business. If anything, you need to make yourself redundant from the day-to-day operations, even if you appear highly active for the clients that you support. 

Ultimately, your exit strategy depends on your current business structure and whether you have an obvious successor for the business within your employees or your family. Regardless of whether your ambition is to sell, or for succession, your business needs to:

• Have efficient processes and practices: implement appropriate practices, use them reliably, and ensure that the business is a well-oiled machine. Potential buyers or successors will want to be able to step into a business and continue running it the same, day to day, without a loss of service to clients. They can only do this if the business can run independently of the specific individuals that the business employs. This still applies even if you are a sole trader.

• Document its practices: businesses are a more attractive proposition, if the buyer is clear on how the business runs and can see and understand it. Documenting practices, processes, and even notes about client needs, acts as reassurance that the business is ready for sale.

• Be future-proof: if you’re running your business for you, it doesn’t necessarily matter how you do things, but a buyer will expect the latest best-practice to be in place already. They have enough to learn and manage when taking over, so they’ll want to see that you’ve adopted the latest guidance and systems, and that you’re offering your clients relevant, scalable services. This is a key failing in the sale of many businesses, as operators, particularly sole traders, stick with doing what they’ve always done, preventing the value of their skills – client relationships and trusted advice – from being realised. It needs to be easier for a buyer or successor to grow through the acquisition, than to start up their own business and scoop up clients after you have closed.

• Maximise value: in the same way you advise your clients on how to grow their business, maximise profit and market attractiveness, you need to do the same for your own. Cast your expert eye over your business and identify the strategies you need to implement to maximise the value. Then, implement those strategies.

• Work out its contingencies: a lot of business sales and closures are driven by unexpected events. Health issues, family breakdowns, and stress, are all key examples. You may not have the choice how or when you sell your business, so you need to work out the steps you want to take in the event of these external factors. You should also regularly value your business – even if it’s a rough guide – so that in the event you need your contingency planning, you have an idea of what would be an acceptable return for the business.
  
• Identify a target buyer: while this doesn’t have to be an actual company that you want to buy your business, having an idea of who you are positioning the business for, helps you to take the necessary steps to make it attractive. Selling to another sole trader who is starting out, will be a different proposition to selling to a local competitor, or selling to an out-of-region business looking for expansion. They will want to know why your business is a suitable candidate, the goodwill and value of the clients, and knowledge that they cannot acquire themselves if they were to start-up, and the plan for the future of the business and business continuity. Identifying a model buyer can help guide your thinking and your planning to make you a suitable candidate when the time comes.

• Provide clarity to relevant stakeholders: most appropriate for succession planning, stakeholders that will have a role to play, will have an interest in the details. Understanding your exit timeline, your potential value or cost to exit, and your own expectations, will make it easier for them to contribute. 

John concludes “Exit planning is not a one-size-fits-all, and it certainly isn’t a one-off process. Your exit strategy will change as your business changes, so it is essential that you revisit it regularly, and always keep an eye to the future. It can also be hard to offer your own business the expert insight that is straightforward to offer clients, so don’t be afraid of procuring external resource and advice to support your thinking.”

The IFA has a webinar on succession planning on 19 July. Please visit the website to register your interest and for more information.